|
|
SOAH DOCKET NO. 304-21-0913.13
CPA HEARING NO. 116,326
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: January 1, 2013 THROUGH December 31, 2013
SOAH DOCKET NO. 304-21-0914.13
CPA HEARING NO. 116,327
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: January 1, 2015 THROUGH December 31, 2015
SOAH DOCKET NO. 304-21-0915.13
CPA HEARING NO. 116,328
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: January 1, 2014 THROUGH December 31, 2014
SOAH DOCKET NO. 304-21-0916.13
CPA HEARING NO. 116,329
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: January 1, 2016 THROUGH December 31, 2016
SOAH DOCKET NO. 304-21-0917.13
CPA HEARING NO. 116,330
RE: **************
TAXPAYER NO: **************
AUDIT OFFICE: **************
AUDIT PERIOD: January 1, 2012 THROUGH December 31, 2012
Franchise Tax/RFD
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
GLENN HEGAR
Texas Comptroller of Public Accounts
DIONNE BARNER
Representing Respondent
JAMIE BOWDEN
Representing Claimant
COMPTROLLER’S DECISION
This decision is considered final on March 4, 2022, unless a motion for rehearing is timely filed; this date of finality is calculated based on the Administrative Procedure Act (APA).[1] The failure to timely file a motion for rehearing may result in adverse legal consequences.
Administrative Law Judge (ALJ) Keneshia Washington of the State Office of Administrative Hearings (SOAH) issued a Proposal for Decision (PFD) that includes Findings of Fact and Conclusions of Law. SOAH served the PFD on each party and each party was given an opportunity to file exceptions and replies with SOAH in accordance with SOAH’s rules of procedure. The ALJ amended the PFD. The ALJ recommended that the Comptroller adopt the Amended PFD as written.
After review and consideration, IT IS ORDERED that the Amended PFD is adopted as changed.[2]
The results from this Decision are Attachments A. The ALJ’s letter to the Comptroller is Attachment B. The Amended PFD as changed is Attachment C. Attachments A, B, and C are incorporated by reference.
Attachments A reflect zero amounts due.
SIGNED on this 7th day of February 2022.
GLENN HEGAR
Comptroller of Public Accounts
By: Lisa Craven
Deputy Comptroller
Attachments A, Texas Notifications of Hearing Results
Attachment B, ALJ’s letter to the Comptroller
Attachment C, Amended Proposal for Decision as changed
ATTACHMENT B
State Office of Administrative Hearings
Kristofer Monson
Chief Administrative Law Judge
August 11, 2021
The Honorable Glenn Hegar
Comptroller of Public Accounts
LBJ Building
111 E. 17th Street, 1st Floor
Austin, TX 78701
RE: SOAH Docket: 304-21-0913.13 et seq.
TCPA Hearing No.: 116,326 et seq
Taxpayer No.: **************
************** v. Texas Comptroller of Public Accounts
Dear Comptroller Hegar:
Please be advised that Claimant filed exceptions to the Proposal for Decision (PFD) issued in the above-referenced hearing on June 11, 2021. Staff filed a reply to Claimant’s exceptions on June 28, 2021.
Claimant’s exceptions reassert arguments made in the hearing. Specifically, Claimant contends that costs disallowed as rehandlling and selling costs should be allowed as direct costs; janitorial and security costs categorized as indirect costs should be categorized as direct costs not subject to the 4% cap; square footage of its fitting rooms and sales floor used to store merchandise during closing hours should be included in the footage allocated for storage; and the increased storage allocation percentage should be applied to janitorial and security services as direct costs. The Administrative Law Judge (ALJ) reviewed the exceptions and the reply and recommends that the exceptions be rejected.
Claimant further contends that the PFD does not address its contention that service costs not related to storage and handling should be categorized as indirect COGS subject to the 4% cap. The PFD addresses this contention on pages 8 and 11. Specifically, the PFD states on page 11, “The Comptroller has explained that service costs that are not allocable to the acquisition of goods may not be included in a taxpayer’s COGS deduction, but are used to calculate the 4% cap. STAR Document No. 201307727L (July 16, 2013). Hence, Claimant’s contention should be denied.”
In its Reply to Claimant’s exceptions, Staff disagrees with Claimant’s exceptions. However, Staff excepts to language in the quote to Sunstate Equip. Co., L.L.C. v. Hegar, 601 S.W.3d 685 (Tex. 2020) on page 9 of the PFD so that it is consistent with Conclusion of Law 18. The ALJ agrees with Staff’s exception and has amended the PFD with regard to the quote. This change does not constitute a substantive amendment that would afford the parties an opportunity to file exceptions.
A copy of the Amended PFD is enclosed. The ALJ recommends that the Amended PFD be adopted as written. Because SOAH has concluded its involvement in the matter, the case is being remanded to the Texas Comptroller of Public Accounts. See Tex. Gov’t Code § 2003.051(a).
Sincerely,
Keneshia Washington
Administrative Law Judge
ATTACHMENT C
SOAH DOCKET NO. 304-21-0913.13
TCPA DOCKET NO. 116,326
**************
Taxpayer No. **************
SOAH DOCKET NO. 304-21-0914.13
TCPA DOCKET NO. 116,327
**************
Taxpayer No. **************
SOAH DOCKET NO. 304-21-0915.13
TCPA DOCKET NO. 116,328
**************
Taxpayer No. **************
SOAH DOCKET NO. 304-21-0916.13
TCPA DOCKET NO. 116,329
**************
Taxpayer No. **************
SOAH DOCKET NO. 304-21-0917.13
TCPA DOCKET NO. 116,330
**************
Taxpayer No. **************
v.
TEXAS COMPTROLLER OF PUBLIC ACCOUNTS
BEFORE THE STATE OFFICE OF ADMINISTRATIVE HEARINGS
AMENDED PROPOSAL FOR DECISION
************** (Claimant) requested a refund of franchise tax remitted during report years 2012-2016. The Tax Division (Staff) of the Texas Comptroller of Public Accounts (Comptroller) denied the refund claims in part, and Claimant requested a refund hearing for each report year. Claimant contends it was entitled to additional costs of goods sold (COGS) deductions for each report year. Staff argues that Claimant has not provided sufficient documentation to support any additional refund amounts. In this Amended Proposal for Decision (PFD), the Administrative Law Judge (ALJ) recommends that Claimant’s contentions should be denied and the partial refunds upheld.
I. PROCEDURAL HISTORY, NOTICE & JURISDICTION
Staff referred the contested cases to the State Office of Administrative Hearings (SOAH) and, on January 6, 2021, issued Notices of Hearing to Claimant. On January 7, 2021, ALJ Keneshia Washington issued Order No. 1, which joined the cases for the purpose of issuing a single PFD and included the requirements for the oral hearing by videoconference. Claimant was represented by COMPANY A. Dionne Barner represented Staff. The contested case record closed on April 29, 2021.
There are no issues of notice or jurisdiction; therefore, those matters are set out in the Findings of Fact and Conclusions of Law without further discussion.
II. REASONS FOR DECISION
A. Evidence Presented
Staff offered the testimony of Ms. Karen Tram and the following exhibits:
1. 60-Day Letter;
2. Refund Audit Report;
3. Refund Audit Plan;
4. Refund Claim; and
5. Independent Audit Review Report.
Claimant presented the testimony of INDIVIDUAL and offered the following exhibits:
1. Time Motion Study;
2. Summarized Time Motion Study for Labor Costs Disallowed Under Audit;
3. Storage Allocation and Direct Costs Classified as Indirect Costs Under Audit;
4. Storage Allocation and Direct Cost Increase Due to Storage Allocation;
5. Store Pictures of COMPANY B;
6. Floor Plan;
7. Sunstate Equip. Co., L.L.C. v. Hegar, 601 S.W.3d 685 (Tex. 2020);
8. Brief for Respondents – Comptroller of Public Accounts of the State of Texas Brief – Sunstate Equip. Co., LLC v. Hegar, 601 S.W.3d 685 (Tex. 2020);
9. State Tax Automated Research (STAR) Doc. 201311809H (November 21, 2013);
10. STAR Doc. 201307727L (July16, 2013);
11. Tex. Tax Code § 171.1012;
12. 34 Tex. Admin. Code § 1.26;
13. 103 Ky. Admin Reg. 31:050;
14. Cal. Code Regs. Tit. 18 § 1655;
15. Mich. Admin. Code r. 205.16;
16. Definition of Idle Facility; and
17. Store Operating Statements for Report Years 2012-2016.
The parties’ exhibits were admitted into the record without objection.
B. Agreed Adjustments
Staff did not agree to additional refund amounts.
C. Facts Established and Issues Presented
During the periods at issue, Claimant operated retail stores as COMPANY B and COMPANY C. In August 2016, Claimant requested a refund of franchise tax for report years 2012‑2016, contending tax had been overpaid due to its understatement of its COGS deduction.[3] Specifically, Claimant asserts its COGS failed to include expenses related to labor and storage costs in the operation of its off-price retail apparel and home fashion stores, as well as indirect costs as allowed by Texas Tax Code § 171.1012(f).
Claimant provided federal income tax returns, apportionment schedules, work papers and schedules, and an organization chart for the auditor to review. It completed a Time Motion study in which store operations department personnel observed its retail store employees to capture the average time spent on specific tasks. Claimant created a number of standard labor categories to classify the type of work being performed. Staff does not dispute the validity of the Time Motion study, and Staff utilized the percentages from the study, by activity description, in determining allowable COGS related to employee store labor. The study categorized employees into Key Carriers and Retail Associates. Key Carriers are employees in a managerial role over the Retail Associates. The study then categorized specific tasks within each category. For Key Carriers, the auditor disallowed the tasks of markdowns, sales floor recovery, audits (sizing/hard tag), managing flexing and merchandising, managing shortage processes, and managing sales floor recovery/markdowns as rehandling or selling costs. The auditor disallowed 50% of the labor costs allocated to the flexing/merchandising task because the task involved both stocking and restocking. The auditor partially allowed labor costs for stockroom supervising trash disposal based on the results of the Independent Audit Review Report, but disallowed the remainder of the labor allocated to the task as selling costs. For Retail Associates, the auditor disallowed the tasks of fitting room recovery, taking markdowns, scanning for markdowns, fitting room go-backs, sales floor go-backs, daily sales floor preparation, and sales floor recovery as rehandling costs.
Claimant also provided a floor plan representative of its COMPANY B stores and a floor plan representative of its COMPANY C stores. An average of 5.28% of the square footage of Claimant’s floor space was designated as the “processing area.” The auditor allowed 5.28% of Claimant’s storage costs to be included in its COGS calculation. The auditor then agreed to apply that percentage to allowable COGS related to some non-labor retail store expenses as direct costs based on the description of the expenses and the Independent Audit Review Report. For lessor charges, moving, travel, security, payroll, janitorial, and parking expenses, the auditor applied the 5.28% percentage and allocated the expense to indirect costs subject to the 4% cap.
Claimant contends that costs disallowed as rehandling and selling costs should be allowed as direct costs. It also argues that janitorial and security costs categorized as indirect costs are direct costs not subject to the 4% cap. Claimant further asserts the square footage of its fitting rooms and sales floor used to store merchandise during closing hours should be included in the footage allocated to storage, increasing the storage allocation percentage from 5.28% to 44.28%. Finally, it contends the increased percentage should be applied to janitorial and security services as direct costs. Staff disagrees and referred the matter to SOAH.
D. ALJ’s Analysis and Recommendation
Franchise tax is imposed on each taxable entity that does business in this state or that is chartered or organized in this state. Tex. Tax Code § 171.001. The taxable margin of a taxable entity is determined by calculating 70% of total revenue from the entity’s total business, subtracting $1 million from the total revenue from the entity’s entire business, or by subtracting, at the election of the taxable entity, either the COGS or compensation. Id. § 171.101(a)(1). A taxable entity that elects to subtract COGS for the purpose of computing its taxable margin is entitled to include all direct costs of acquiring or producing goods. Id. § 171.1012. The COGS calculation may include labor costs that are properly allocable to the acquisition or production of goods and are of the type subject to capitalization or allocation under Treasury Regulation Sections 1.263A-1(e) or 1.460-5 as direct labor costs, indirect labor costs, employee benefit expenses, or pension and other related costs, without regard to whether the taxable entity is required to or actually capitalizes such costs for federal income tax purposes. 34 Tex. Admin. Code § 3.588(d)(1). In this case, the denied COGS deductions include labor, storage, janitorial, and security costs.
Source: See Conclusion of Law No. 5.
If the Comptroller finds that an amount of tax, penalty, or interest has been unlawfully or erroneously collected, the Comptroller shall credit or refund the amount. Tex. Tax Code § 111.104(a). When a taxpayer requests a refund, including a refund claiming COGS deductions, it must establish by a preponderance of evidence that taxes were erroneously collected or paid. 34 Tex. Admin. Code § 1.26(e); see, e.g., Comptroller’s Decision No. 109,787 (2015); see also Sunstate Equipment Company, L.L.C. v. Hegar, 601 S.W.3d 685 (Tex. 2020).
The taxpayer requesting a refund must show not only that it overpaid but also the exact amount of the overpayment. Nabors Drilling Techs. USA, Inc. v. Hegar, 03 17 00284-CV, 2018 WL 2709201, at *5 (Tex. App.—Austin June 6, 2018, pet. denied) (citing Baker v. Bullock, 529 S.W.2d 279 (Tex. Civ. App.—Austin 1975, writ ref’d n.r.e.); see also, e.g., Comptroller’s Decision No. 114,611 (2019). Pursuant to Texas Tax Code § 111.0041, a taxpayer must produce contemporaneous records and supporting documentation for the transactions in question to substantiate and enable verification of the taxpayer’s claim related to the amount of tax, penalty, or interest to be assessed, collected, or refunded. See 34 Tex. Admin. Code § 1.26(a). Factual assertions in pleadings do not constitute evidence. See, e.g., Comptroller’s Decision No. 111,587 (2015). A taxpayer cannot satisfy its burden of proof with uncorroborated testimony on the ultimate issue to be proven. See Tex. Tax Code §§ 111.0041, 171.211151.025; 34 Tex. Admin. Code § 3.281(b); see also, e.g., Comptroller’s Decision Nos. 114,570 (2019), 109,188 (2017), 104,278 (2012).
Source: See Conclusion of Law No. 13.
There is no dispute that Claimant is a retailer that acquires and resells tangible personal property. COGS includes all direct costs of acquiring or producing the goods, including storage costs, subject to Subsection (e). Tex. Tax Code § 171.1012(c)(5); 34 Tex. Admin. Code § 3.588(d)(5). Handling costs related to the acquisition of goods are costs that are properly included in the COGS deduction. Tex. Tax Code Section § 171.1012(c)(4); 34 Tex. Admin. Code § 3.588(d)(4). For retailers, costs of acquisition include compensation paid to employees that stock the shelves and warehousing costs. See Comptroller’s Decision Nos. 109,185 and 109,186 (2014); STAR Document Nos. 201101084L (2011) and 201307727L (2013). However, some costs are specifically excluded and cannot be deducted. COGS does not include, for example, selling costs, including employee expenses related to sales. See Tex. Tax Code § 171.1012(e)(2); 34 Tex. Admin. Code § 3.588(g)(2). Idle facility expenses and rehandling costs also are not includable in COGS. Tex. Tax Code § 171.1012(e)(5), (6); 34 Tex. Admin. Code § 3.588(g)(5), (6). The Comptroller’s interpretation of the Tax Code is that a retailer’s COGS deduction can include costs that are incurred from the point of acquisition of the goods (inventory) through the point of putting the goods on display for sale. See, e.g., Comptroller’s Decision No. 106,998 (2013). Costs incurred after the point the goods are displayed are considered selling costs and are not allowed as a COGS. Id. For example, while compensation that is paid to employees who stock grocery store shelves can be included in a COGS deduction, compensation paid to cashiers and baggers cannot. See, e.g., Comptroller’s Decision Nos. 107,281 and 107,282 (2013); see also, Tax Policy News, January 2011, STAR Document No. 201101084L.
A taxable entity may subtract as COGS indirect or administrative overhead costs, including all mixed service costs, such as security services, legal services, data processing services, accounting services, personnel operations, and general financial planning and financial management costs, that it can demonstrate are allocable to the acquisition or production of goods, except that the amount subtracted may not exceed four percent of the taxable entity’s total indirect or administrative overhead costs, including all mixed service costs. Tex. Tax Code § 171.1012(f); 34 Texas Admin. Code § 3.588(f). Any costs excluded under Subsection (e) may not be subtracted under this subsection. Id. Service costs are “[i]ndirect costs and administrative overhead costs that can be identified specifically with a service department or function, or that directly benefit or are incurred by reason of a service department or function. For purposes of this section, a service department includes personnel (including costs of recruiting, hiring, relocating, assigning, and maintaining personnel records or employees); accounting (including accounts payable, disbursements, and payroll functions); data processing; security; legal; general financial planning and management; and other similar departments or functions.” 34 Tex. Admin. Code § 3.588(b)(9). The Comptroller has explained that “all service costs, even those that might also be categorized as labor costs or other types of includable expenses, fall under 3.588(f) and are subject to the 4% cap.” STAR Document No. 201307727L (July 16, 2013).
Claimant contends that disallowed costs of labor performed by Retail Associates, including go-backs, sales floor organizing, and scanning for markdowns, and Key Carriers, including managing sales floor recovery and markdowns, are includable in COGS as handling costs because the items being handled had not yet been sold. However, Claimant’s position is not supported by current jurisprudence. The Texas Supreme Court explained:
“While ‘rehandling’ is not defined, it undoubtedly means ‘handling again.’ Rehandle, Webster’s New Int’l Dictionary (2002) (“To handle again.”); see City of Dall. v. TCI W. End, Inc., 463 S.W.3d 55-56 (Tex. 2015) (per curiam) (“We must avoid adopting an interpretation that ‘renders any part of the statute meaningless.”). By specifically excluding costs associated with handling goods again (and again, in the case of rental goods), the Legislature removed the possibility that an entity could subtract costs for acquiring the same goods repeatedly. Thus, the Legislature narrowed the potentially broad definition of ‘acquire’ to refer to direct costs associated with the initial receipt of goods that will ultimately be sold.” Sunstate Equip. Co., L.L.C., 601 S.W.3d at 698.
Based on the court’s definition of “rehandling,” Claimant can include in COGS as a direct cost of acquiring the goods only the labor related to its initial acquisition of the goods. In accordance with Comptroller jurisprudence, direct costs of acquiring the goods are includable in COGS until the goods are put on display for sale. See, e.g., Comptroller’s Decision No. 106,998 (2013). The tasks that Claimant seeks to include in its COGS calculation, including labor for go‑backs, returned merchandise, and sales floor organization, are not handling costs because they involve the handling again of items that Claimant has already acquired and placed on display for sale. Claimant’s request to include these tasks in COGS as handling costs is contrary to the statutory interpretation intended by the Legislature and the explanation of the term “rehandle” by the Texas Supreme Court. Therefore, Claimant’s request to include additional labor costs as direct costs in its COGS calculation should be denied.
Claimant also contests the allowed percentage of storage in its COGS calculation. The auditor allowed 5.28% of the square footage of Claimant’s floor plan to be allowed as storage costs that are direct costs of acquiring goods for sale. The percentage is based on an average of the area designated as the “processing area” in the floor plans. Claimant argues the storage allocation should be 44.28% which would include the processing area, the fitting rooms, and the sales floor during closed hours. It asserts that both the fitting room and the sales floor during closed hours are includable in the storage allocation because the spaces are used to store inventory and process inventory. Specifically, Claimant contends that during the time the stores are closed, the fitting rooms and sales floor space are no longer used for any selling activities but rather solely act as storage for the inventory. Staff argues the record evidence shows the fitting rooms were not used for storage. Moreover, the Independent Audit Reviewer visited a COMPANY B Store location and did not observe any evidence that storage occurs in or around the fitting room. Claimant’s documents and INDIVIDUAL’s testimony establish that the fitting rooms and the areas around them include z-racks stacked with clothing previously tried on by customers and waiting to be put back on the sales floor. Hence, the record evidence establishes that the fitting rooms were used for rehandling goods that had already been displayed for sale. The items placed on the sales floor are items that have been displayed for sale even when the store is closed. As previously discussed, costs incurred after the point the goods are displayed are considered selling costs and are not allowed as a COGS. See, e.g., Comptroller’s Decision No. 106,998 (2013).
Claimant also asserts, and INDIVIDUAL testified that at times, some items are processed on the sales floor or in the fitting rooms prior to being placed on display on the sales floor. Neither the Time Motion study nor any other documents show that the fitting rooms and sales floor are used to process items before they are displayed for sale. Furthermore, record evidence does not specify any percentages regarding the asserted mixed use of the fitting rooms and sales floor for processing items prior to display for sale versus post display rehandling. INDIVIDUAL’s testimony and assertions in Claimant’s pleadings are insufficient to cure these evidentiary gaps. Therefore, record evidence does not support an increase in the square footage allowed as storage costs includable in COGS.
Claimant further contends that its security and janitorial costs covered by the storage allocation percentage are includable in the calculation of its direct costs of acquiring its goods. Claimant’s janitorial and security services are service costs under 34 Texas Administrative Code § 3.588(b)(9). The auditor applied the 5.28% storage allocation to the janitorial and security services, subject to the 4% cap for indirect costs. Claimant argues a storage allocation of 44.28% should be applied to its janitorial and security services without the 4% cap, asserting that when the janitorial and security services are applied to the storage area, which is a direct cost, the 4% cap should not be applied because the services should be deemed direct costs, not indirect costs. However, Claimant’s contention is contradicted by statute, Rule, and Comptroller’s jurisprudence. The evidence establishes, and Claimant acknowledges, that the janitorial and security costs that it contends are direct costs are store expenses relating to store operations. Texas Tax Code § 171.1012(f) expressly states that administrative overhead costs are subject to the 4% cap. That Section lists security services as an example. Expenses for janitorial services are administrative overhead costs that are subject to the 4% cap. The Section also expressly states that expenses must be allocable to the acquisition goods in order to be includable in COGS and subject to the 4% cap. Based on the statute, the Rule, and Comptroller jurisprudence, Claimant’s janitorial and security services related to the storage allocation are subject to the 4% cap. Claimant contends that its higher asserted storage allocation should be applied to its janitorial and security services. However, as discussed above, the fitting room and sales floor square footage are properly excluded from the storage allocation. Therefore, Claimant’s contention should be denied.
Although Claimant contends that some janitorial and security costs are direct costs, Claimant contends that its janitorial and security services beyond the storage allocation percentage should be included in COGS as indirect costs subject to the 4% cap. However, Texas Tax Code § 171.1012(f) states that indirect expenses or administrative overhead costs must be allocable to the acquisition of goods to be includable in COGS at all. The Comptroller has explained that service costs that are not allocable to the acquisition of goods may not be included in a taxpayer’s COGS deduction, but are used to calculate the 4% cap. STAR Document No. 201307727L (July 16, 2013). Hence, Claimant’s contention should be denied. Based on the foregoing, the partial denial of Petitioner’s refund claims should be upheld.
III. FINDINGS OF FACT
1. ************** (Claimant) operates retail stores as COMPANY B and COMPANY C.
2. In August 2016, Claimant requested a refund of franchise tax for report years 2012-2016, contending tax had been overpaid due to its understatement of its costs of goods sold (COGS) deduction.
3. The Tax Division (Staff) partially denied the refund claims.
4. Claimant requested a refund hearing for each report year.
5. Claimant provided federal income tax returns, apportionment schedules, work papers and schedules, and an organization chart for the auditor to review.
6. Claimant completed a Time Motion study in which store operations department personnel observed its retail store employees to capture the average time spent on specific tasks.
7. Claimant created a number of standard labor categories to help classify the type of work being performed.
8. Staff did not dispute the validity of the Time Motion study and utilized the percentages from the study, by activity description, in determining the allowable COGS related to employee store labor.
9. The Time Motion study categorized Claimant’s employees into Key Carriers and Retail Associates. Key Carriers are employees in a managerial role over the Retail Associates.
10. For Key Carriers, the auditor disallowed the tasks of markdowns, sales floor recovery, audits (sizing/hard tag), managing flexing and merchandising, managing shortage processes, and managing sales floor recovery/markdowns as rehandling or selling costs. The auditor disallowed 50% of the labor costs allocated to the flexing/merchandising task because the task involved both stocking and restocking. The auditor partially allowed stockroom supervising trash disposal based on the results of the Independent Audit Review Report, but disallowed the remainder of the labor allocated to the task as selling costs.
11. For Retail Associates, the auditor disallowed the tasks of fitting room recovery, taking markdowns, scanning for markdowns, fitting room go-backs, sales floor go-backs, daily sales floor preparation, and sales floor recovery as rehandling costs.
12. Claimant provided a floor plan representative of its COMPANY B stores and a floor plan representative of its COMPANY C stores. An average of 5.28% of the square footage of Claimant’s floor space was designated as the “processing area” on Claimant’s floor plans. The auditor allowed 5.28% of Claimant’s storage costs to be included in its COGS calculation.
13. The auditor agreed to apply 5.28% to allowable COGS related to some non-labor retail store expenses as direct costs based on the description of the expenses and the Independent Audit Review Report.
14. For lessor charges, moving, travel, security, payroll, janitorial, and parking expenses, the auditor applied the 5.28% percentage and allocated the expense to indirect costs subject to the 4% cap.
15. Staff referred the contested cases to the State Office of Administrative Hearings (SOAH) and, on January 6, 2021, issued Notices of Hearing to Claimant. Each notice contained a statement of the date, time, and location of the hearing, the nature of the hearing; a statement of the legal authority and jurisdiction under which the hearing was to be held; a reference to the particular sections of the statutes and rules involved; and a short, plain statement of the factual matters asserted, or an attachment that incorporated by reference the factual matters asserted in the complaint or petition filed with the state agency.
16. On January 7, 2021, the Administrative Law Judge issued Order No. 1, combining the contested cases for purposes of issuing a single Proposal for Decision and including the requirements for the oral hearing by videoconference.
17. The joined hearing convened on April 14, 2021.
18. Claimant presented the testimony of its Director of Store Strategy and Method Improvements, INDIVIDUAL. INDIVIDUAL testified that at times, some items are processed on the sales floor or in the fitting rooms prior to being placed on display on the sales floor.
19. The contested case record closed on April 29, 2021.
IV. CONCLUSIONS OF LAW
1. The Comptroller has jurisdiction over this matter. See Tex. Tax Code ch. 111.
2. SOAH has jurisdiction over matters related to the hearing in this matter, including the authority to issue a proposal for decision with findings of fact and conclusions of law. See Tex. Gov’t Code ch. 2003.
3. Staff provided proper and timely notice of the hearing. See Tex. Gov’t Code ch. 2001; Tex. Tax Code § 111.105.
4. Franchise tax is imposed on each taxable entity that does business in this state or that is chartered or organized in this state. Tex. Tax Code § 171.001.
5. The taxable margin of a taxable entity is determined by calculating 70% of total revenue from the entity’s total business, subtracting $1 million from the total revenue from the entity’s entire business, or by subtracting, at the election of the taxable entity, either the COGS or compensation. Tex. Tax Code § 171.101(a)(1).
Source: See HB 500, 83rd Leg., 2013; Finding of Fact No. 2.
6. A taxable entity that elects to subtract COGS for the purpose of computing its taxable margin is entitled to include all direct costs of acquiring or producing goods. Tex. Tax Code § 171.1012.
7. The COGS calculation may include labor costs that are properly allocable to the acquisition or production of goods and are of the type subject to capitalization or allocation under Treasury Regulation Sections 1.263A-1(e) or 1.460-5 as direct labor costs, indirect labor costs, employee benefit expenses, or pension and other related costs, without regard to whether the taxable entity is required to or actually capitalizes such costs for federal income tax purposes. 34 Tex. Admin. Code § 3.588(d)(1).
8. If the Comptroller finds that an amount of tax, penalty, or interest has been unlawfully or erroneously collected, the Comptroller shall credit or refund the amount. Tex. Tax Code § 111.104(a).
9. When a taxpayer requests a refund, including a refund claiming COGS deductions, it must establish by a preponderance of evidence that taxes were erroneously collected or paid. 34 Tex. Admin. Code § 1.26(e); see, e.g., Comptroller’s Decision No. 109,787 (2015); see also Sunstate Equipment Company, L.L.C. v. Hegar, 601 S.W.3d 685 (Tex. 2020).
10. The taxpayer requesting a refund must show not only that it overpaid but also the exact amount of the overpayment. Nabors Drilling Techs. USA, Inc. v. Hegar, 03‑17‑00284-CV, 2018 WL 2709201, at *5 (Tex. App.—Austin June 6, 2018, pet. denied) (citing Baker v. Bullock, 529 S.W.2d 279 (Tex. Civ. App.—Austin 1975, writ ref’d n.r.e.); see also, e.g., Comptroller’s Decision No. 114,611 (2019).
11. Pursuant to Texas Tax Code § 111.0041, a taxpayer must produce contemporaneous records and supporting documentation for the transactions in question to substantiate and enable verification of the taxpayer’s claim related to the amount of tax, penalty, or interest to be assessed, collected, or refunded. See 34 Tex. Admin. Code § 1.26(a).
12. Factual assertions in pleadings do not constitute evidence. See, e.g., Comptroller’s Decision No. 111,587 (2015).
13. A taxpayer cannot satisfy its burden of proof with uncorroborated testimony on the ultimate issue to be proven. See Tex. Tax Code §§ 111.0041, 171.211151.025; 34 Tex. Admin. Code § 3.281(b); see also, e.g., Comptroller’s Decision Nos. 114,570 (2019), 109,188 (2017), and 104,278 (2012).
Source: The deleted citations relate to sales and use tax provisions. Citations to similar record-keeping provisions, applicableto franchise tax, are substituted. See Finding of Fact No. 2.
14. COGS includes all direct costs of acquiring or producing the goods, including storage costs, subject to Subsection (e). Tex. Tax Code § 171.1012(c)(5); 34 Tex. Admin. Code § 3.588(d)(5).
15. COGS does not include idle facility expenses in relation to the taxable entity’s goods. Tex. Tax Code § 171.1012(e)(5); 34 Tex. Admin. Code § 3.588(g)(5).
16. Handling costs related to the acquisition of goods are direct costs that are properly included in the COGS deduction. Tex. Tax Code Section § 171.1012(c)(4); 34 Tex. Admin. Code § 3.588(d)(4).
17. COGS does not include rehandling costs. Tex. Tax Code Section § 171.1012(e)(6); 34 Tex. Admin. Code § 3.588(g)(6).
18. “While ‘rehandling’ is not defined, it undoubtedly means ‘handling again.’ Rehandle, Webster’s New Int’l Dictionary (2002) (“To handle again.”); see City of Dall. v. TCI W. End, Inc., 463 S.W.3d 55-56 (Tex. 2015) (per curiam) (“We must avoid adopting an interpretation that ‘renders any part of the statute meaningless.”). By specifically excluding costs associated with handling goods again (and again, in the case of rental goods), the Legislature removed the possibility that an entity could subtract costs for acquiring the same goods repeatedly. Thus, the Legislature narrowed the potentially broad definition of ‘acquire’ to refer to direct costs associated with the initial receipt of goods that will ultimately be sold.” Sunstate Equip. Co., L.L.C., 601 S.W.3d at 698.
19. COGS does not include selling costs, including employee expenses related to sales. See Tex. Tax Code § 171.1012(e)(2); 34 Tex. Admin. Code § 3.588(g)(2).
20. A retailer’s COGS deduction can include costs that are incurred from the point of acquisition of the goods (inventory) through the point of putting the goods on display for sale. See, e.g., Comptroller’s Decision No. 106,998 (2013).
21. Costs incurred after the point the goods are displayed are considered selling costs and are not allowed as COGS. See, e.g., Comptroller’s Decision No. 106,998 (2013).
22. While compensation that is paid to employees who stock grocery store shelves can be included in a COGS deduction, compensation paid to cashiers and baggers cannot. See, e.g., Comptroller’s Decision Nos. 107,281 and 107,282 (2013); see also, Tax Policy News, January 2011, State Tax Automated Research (STAR) Document No. 201101084L.
23. A taxable entity may subtract as a cost of goods sold indirect or administrative overhead costs, including all mixed service costs, such as security services, legal services, data processing services, accounting services, personnel operations, and general financial planning and financial management costs, that it can demonstrate are allocable to the acquisition or production of goods, except that the amount subtracted may not exceed four percent of the taxable entity's total indirect or administrative overhead costs, including all mixed service costs. Any costs excluded under Subsection (e) may not be subtracted under this subsection. Tex. Tax Code § 171.1012(f); 34 Tex. Admin. Code § 3.588(f).
24. Service costs are “[i]ndirect costs and administrative overhead costs that can be identified specifically with a service department or function, or that directly benefit or are incurred by reason of a service department or function. For purposes of this section, a service department includes personnel (including costs of recruiting, hiring, relocating, assigning, and maintaining personnel records or employees); accounting (including accounts payable, disbursements, and payroll functions); data processing; security; legal; general financial planning and management; and other similar departments or functions. 34 Tex. Admin. Code § 3.588(b)(9).
25. All service costs, even those that might also be categorized as labor costs or other types of includable expenses, fall under 34 Texas Administrative Code § 3.588(f) and are subject to the 4% cap. STAR Document No. 201307727L (July 16, 2013).
26. Service costs that are not allocable to the acquisition of goods may not be included in a taxpayer’s COGS deduction, but are used to calculate the 4% cap. STAR Document No. 201307727L (July 16, 2013).
27. Claimant has not established by a preponderance of the evidence that additional labor costs are includable in its COGS calculation.
28. The evidence does not support an increase in the square footage allowed as storage costs includable in COGS.
29. Claimant’s janitorial and security services are service costs under 34 Texas Administrative Code § 3.588(b)(9).
30. Claimant’s janitorial and security services allocable to the acquisition of goods based on the storage allocation are subject to the 4% cap.
31. Service costs that are not allocable to the acquisition of goods may not be included in a taxpayer’s COGS deduction, but are used to calculate the 4% cap.
32. Claimant failed to demonstrate, by a preponderance of the evidence, that its expenses during the periods at issue were qualifying COGS.
33. The partial refund denials should be affirmed.
SIGNED August 11, 2021.
KENESHIA WASHINGTON
ADMINISTRATIVE LAW JUDGE
STATE OFFICE OF ADMINISTRATIVE HEARINGS
ENDNOTES:
[1] The date calculated is 25 days after this decision is signed. See APA, Tex. Gov’t Code § 2001.146(a); S.B. 1095, Acts 2017, 85th Leg. For additional guidance, refer to the Frequently Asked Questions Related to Motions for Rehearing, found here: http://comptroller.texas.gov/taxes/publications/96-1789.pdf
[2] See Tex. Gov’t Code § 2003.101(e) and (f).
[3] Claimant’s refund request also included claims that its total revenue was overstated; however, this issue was not raised in subsequent pleadings and was not included in the Notice of Hearing.